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Spending Account Benefit Overview

A spending account is an account that tracks credits to be used on eligible expenses. There are two main types of ways it can be used.

a) As a company reimbursement benefit

b) As a tax-advantage for business owners

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Company Reimbursement

Employees are given a spending account as a part of their benefit strategy. It can be used in combination with a traditional insurance plan as extra coverage or as a stand-alone benefit. In both cases, employees are given a set amount of credits each year that they can use to get reimbursed for eligible expenses.

These eligible expenses vary, depending on the type of spending account that is provided. The most common spending account is health, often referred to as a HSA. This account is tax-free and covers some of the major expenses below:

Dental (Basic & Major)

Orthodontics

Prescription Drugs

Paramedical Services

Vision Care

Physiotherapy

Chiropractor

Note: What is covered under an HSA is determined by Canada Revenue Agency (CRA) guidelines.

Alternatively, employers can also offer a lifestyle spending account (LSA) to their employees. This account allows companies to choose expenses outside of of the CRA approved list so it is considered "taxable" and must be reported promptly on the company payroll. The advantage of having an LSA is an employer is able to emphasize the overall well-being of their employees by selecting coverages that fit with their company culture. The eligible expenses vary between companies but can include things like monthly gym memberships.

Note: You can also have a Flex Spending Account, which combines both HSA and LSA coverage.

For both the Health and Lifestyle Spending Account, the process is for the employee to pay for the expense initially, and then submits their receipts to National HealthClaim for review. Once approved, the expense is funded by the employer and processed for reimbursement.

Personal Business Owner Advantage

A business owner who pays taxes, is actively engaged in their company and has out-of-pocket medical expenses can often receive a better return on their money by using a tax-free health spending account (HSA).

Out-of-pocket expenses are ones that are paid personally because they were not covered by an insurance plan or were just partially covered.

The overall process for this is outlined below:

1) The business owner has receipts, that they paid for personally out-of-pocket.These receipts are eligible health and dental expenses such as some examples listed below:

Dental (Basic & Major)

Orthodontics

Prescription Drugs

Paramedical Services

Vision Care

Physiotherapy

Chiropractor

At this point, these costs have nothing to do with their company and are personal costs to their family. So they are in the same role as any standard employee. The owner can submit these receipts to National HealthClaim (an outside administrator) to audit and review. National HealthClaim can approve the expenses if they follow Canada Revenue Agency guidelines for allowable medical expenses.

2) Once a claim is approved, the owner now takes on the perspective of their company. They fund their account with National HealthClaim using company funds.

Note: At this point, the business owner has "paid" for the expense twice. First when they paid personally at the service provider (e.g. dentist) and secondly, now again as a company funding the claim made.

3) National HealthClaim then reimburses the business owner to their personal bank account as if they are an employee making a claim and getting reimbursed. National HealthClaim keeps a small, standard administration fee for the service.

The reason that business owners use this process to manage their out-of-pocket health and dental expenses is that it is tax-efficient, and provides more savings by turning personal expenses into business deductions.